Stochastic Oscillator Bullish Divergence and Bearish Divergence Stocks

Divergence stocks is one of the signals that can be generated when using the stochastic oscillator indicator.

Divergence stocks is a signal that a rally or retracement is losing steam and is likely to reverse. It means that the last buyers or last sellers are pushing the price in one way while the majority of other traders have stopped trading in that direction and are cautious of a price correction or retracement.

There are four types of divergence trading setups

Example 1: Classic Bullish Divergence

A Classic Bullish Divergence in the stochastic oscillator indicator & the price is followed by a rise in price.

Stochastic Oscillator Indicator Classic Bullish Divergence

When the price is making new lows the Stochastic indicator is not moving past its previous lows it is an indication that the downward trend is about to reverse and a bullish rally is likely to occur.

In the example above the price set a new low but it was not coupled with a new low in the measure of Stochastic oscillator indicator, when price formed a new low then the stochastic indicator should have followed suit, but the stochastic indicator did not therefore the classic divergence trading setup.

Stocks classic divergence trading setup is even stronger because there is combination of a divergence trade setup and then followed by a rise above the 20% indicator level. This combines the Overbought and Oversold levels with this divergence trading setup.

Example 2: Classic Bearish Divergence

A Classic Bearish Divergence trading setup in the stochastic oscillator indicator & the price is followed by a drop in price.

Stochastic Oscillator Indicator Classic Bearish Divergence

When price is making new highs but the Stochastic oscillator indicator is not moving beyond its previous high it is an indication the upward trend will reverse and that a bearish divergence trade setup will follow.

This classic bearish divergence trade setup is even stronger because there is a combination of a divergence with a dip below the overbought 80 level.

Example 3: Hidden Bullish Divergence

Hidden Bullish Divergence trade setup signifies a retracement in an up-wardupwards stock trend. This hidden divergence trading setup is the best type of divergence setup to trade, because you aren't trading a price reversal, but you are trading within the direction of the trend.

Stochastic Oscillator Indicator Hidden Bullish Divergence

Even though, the stochastic oscillator indicator made a lower low the price low was higher than the previous low (higher low). This means that even though the sellers made a good attempt to push price down as indicated by the stochastic indicator, this was not reflected on the price, and the price did not make a new low. This is the best place to open a buy trade, since it's even in an upwards trend there is no need to wait for a confirmation signal, because you are buying in an upwards stock trend.

Example 4: Hidden Bearish Divergence

Hidden Bearish Divergence setup signifies a retracement in a downward trend.

Stochastic Oscillator Indicator Hidden Bearish Divergence

Hidden bearish divergence setup is the best type of divergence to trade, because you aren't trading a price trend reversal, but you are trading within the direction of the trend. This is the best place to open a sell trade, since it is even in a downward trend there is no need to wait for a confirmation signal, because you are selling in a downward trend.